What Do You Know About FHA?

FHA update

FHA-the Good Guys

Don’t have much down payment? Credit scores not the best? Have many, many bills? If these apply to you and you still want to buy a house and have enough income, then FHA may be the loan for you. FHA has been providing loans for 80 years and is still going strong. In fact, during this recent recession, FHA has often been the only available source for mortgage funds as other banks hoarded their funds. In the past few years, FHA has provided about half of all new mortgages.

In fact, In 2010, FHA provided 56 % of loans for all first-time home buyers, and 60 percent of all African-American and Hispanic home buyers. In addition, 85% of borrowers obtaining homes at the higher loan limits had incomes below $150,000, and nearly 65% had incomes less than $100,000.

FHA, Federal Housing Authority, was established by the US government in 1934 to help buyers get mortgages so they could purchase homes. FHA does not originate mortgages, but FHA provides a guarantee, backed by the faith and credit of the US government, so that lenders using the program are more inclined to provide the money as the risk to them is much less.

Since FHA has been around for so long, over the years various myths and untruths have circulated among potential buyers and sellers.

fha

1. FHA is Bankrupt-WRONG

Because recently so many buyers are using the FHA program to purchase homes, the  idea that FHA must be bankrupt or will go bankrupt has emerged. How can the government underwrite so many loans? What if we have another downturn? Will the government be on the hook for trillions of dollars if can’t pay?

This is a complete myth. It’s especially ridiculous because at this very moment FHA’s current cash reserves total $33.7 billion – a $400 million increase from a year ago. These reserves are fully capitalized to pay 30 years’ worth of expected claims and losses. By comparison, the Financial Accounting Standards Board only requires private financial institutions to hold reserves for losses over the next 12 months. FHA has 30 times that amount in their cash reserves, plus another $2.55 billion in the excess capital reserves.

So, adios to that idea. FHA is totally solvent.

2. FHA Was Hit Hard By Foreclosures-WRONG

Many, if not most, banks were hit hard by the current recession, so FHA must have suffered more than most. This is a companion myth to the FHA is bankrupt.

Here’s the real skinny. Yes, FHA was hit by foreclosures; it did have to guarantee some bad home loans. But, the reality is that most of those loans were the older ones, written pre-2006. These loans represent less than 25% of FHA’s portfolio. Realty is 75% of FHA loans were written after 2009 and have superbly good rates of payment.

Loans originated in 2010 & 2011 have the best performance in the 13 year history of the Neighborhood Watch data system with a seriously delinquent rate of 1.85%. Loans originated in last two years now comprise only 7% of the seriously delinquent loans in FHA’s portfolio.

3. New Higher Loan Limits Are Much Riskier-WRONG

As prices on properties began to rise, especially in states like California and New York, many would-be FHA buyers were shut out as loan limits were very low for those areas. So, Congress approved higher loan limits for selected areas. As usual, naysayers grew frightened, reasoning that higher loan amounts put FHA at higher risk.

Here’s the problem with that reasoning. Actually, higher loan amount on the more expensive homes tend to perform better than on the lower-priced homes. This makes sense as you realize that buyers had to qualify for these homes and so have higher incomes and most likely more assets and savings in cash of difficulty.

4. FHA Buyers Are Poor Risks-WRONG

FHA borrowers in FY 2011 have an average credit score above 700. This is the first time the average credit score for FHA borrowers broke the 700 mark. FHA credit quality has improved steadily since 2007, 4th quarter. Over 50% of FHA loans made in every quarter since 2009 (2nd quarter) had credit scores above 680. In 2006 and 2007, only about 20% of the FHA loans insured in 2006-2007 had credit scores above 680.

That’s all well and good, but the great thing about FHA is that those with lower credit scores, but decent income can also qualify as FHA programs are very flexible. And, yes, the down payment required is still 3.5% of the purchase price, though with various FHA fees that amount to more like 7%, still the lowest around. Viva FHA!

What Is The Best Investment Property? Part 1

With the low mortgage rates and super-low housing prices, many investors who have fled the crazy stock market would like to invest in real estate. Most of us think we know something about real estate and, really, we do. After all, everyone lives in real estate of one kind or another. Owning your own home and owning a rental-producing asset are two different things, however. Let’s assume you are looking to purchase rental property for the first time. Let’s also assume that you will have the 30% or 20% down to invest and want to leverage your money to best possible advantage. What would be the best use of your money?

fourplex

Single-Family or Multi-Family?

Many first-time investors automatically gravitate towards single-family homes.  That’s what most people know best, so it makes sense. But, is that the best use of the available money? I would say no. On the same amount of land and  often for the same price, it’s possible to purchase a duplex, a triplex or a quadruplex. That means for the same money, you will get double, triple or quadruple the rent. It also means that if one renter does not pay, you still are receiving half the rent, two-thirds or three-quarters. This will make quite a difference because you have to pay the mortgage and the expenses of the property every month whether you have tenants or not.

Therefore,  all things being equal, which they never are exactly, my preference is to purchase a multi-family dwelling instead of a single family one.  A fourplex is probably the most units a first-timer can handle.  Beyond the fourplex also more complicated loans apply. An investor can even purchase up to a four-unit building with an FHA loan which requires only about 3.5% down plus another 3 to 4% in closing costs. Using such a loan puts the investor at a significant advantage due to the gain in leverage from the smaller down payment. fixer Fixer or Repaired?

Many first-time investors naturally tend to look at fixer properties because they are cheaper than properties in good condition.  If the investor is an experienced rehabber or in the construction business, then it might make sense to buy a fixer. As long as the buyer has experience, knows the cost of the needed materials, and can either do the work himself or can get it done at a reasonable price, integrated into the purchase price, then a fixer can be an ideal asset.

For everyone else, though, it’s really not a good idea. During the rehab, the investor is paying the mortgage but receiving no rent. Sometimes repairs take longer than anticipated. As a rule of thumb, rehabbing a property always costs more than anticipated. Besides the loss of rent, the investor should take into consideration the wear and tear on his personal psyche. Searching out reliable contractors and overseeing their work can be exhausting. For someone with a full-time job, the time lost to the new property can never be recovered.

Fully-Occupied or Vacant?

Another issue that investors have to consider is whether they want a fully-occupied or a fully- or partially-vacant building. Often, sellers are trying to get rid of properties which they have saddled with bad tenants or tenants not paying market rents.  Asking for the rent roll and checking it carefully will show if the existing tenants are paying or not. A smart investor also has a good idea what the rents for the proposed purchase property ought to be. The purchase price should usually be a multiple of the yearly rents. Thus, if the yearly gross rents amount to $26,000, then the purchase price should be about 10-12 times the rent, or $260,000- $312000, depending on the market.  In some markets investors will find properties for significantly less.

In the MLS listings, frequently the would-be investor will encounter “pro-forma” rents alongside the actual rents of the property. This means the seller has failed to keep his rents at market, so the potential  or “pro-forma” market rents are included.  That’s fine as long as the price of the property is calibrated on the actual, not the pro-forma, rents. Of course, usually sellers want to base their price on the pro-forma rents.

But, think about it. The new investor will have to approach the existing tenants with a hefty rent increase as a first introduction, not a good start. Some of the tenants will leave rather than pay more. Others will have to be evicted. Whatever happens, it will cost time and money for the new investor. Reasonably, then, the investor should not pay pro-forma prices.

If the investor feels confident that the current renters are paying close to market rents and have a good history of on-time payment, that is the ideal situation. On the other hand, there are good reasons  to purchase a vacant property as well. The new owner will be able to thoroughly investigate each and every unit, which is usually not possible with tenant-occupied, making any repairs or cosmetic updates required. Plus, the new owner will set the deposit amount, the rent amount and the qualifications for the renter. Don’t want dogs? Want to check credit and do a background check? Want to limit smokers? Any of these are possible with a vacant building.

What Is Loan Recasting?

calculator

The housing debacle remains impervious to improvement for millions of homeowners who find themselves unable to sell, unable to refinance and unable to move on with their lives. The post-2007 tightening of  loan guidelines prevents many from using the traditional method of changing a mortgage loan, refinancing.  For some the solution may be in the newly-popular loan recast  offered by some banks. It’s not publicized, but some banks will do it.

What is a Loan Recast?

wad of money

With a loan recast, the borrower puts a significant amount of cash into his current mortgage principal. The principal may be underwater or may show equity, even significant equity. Let’s say the borrower has just received a large inheritance or settlement and would like to take a chunk of it and apply it to his mortgage. Assuming the bank agrees, the loan is then re-calculated, re-amortized at the same rate and terms. The borrower can now look forward to lower mortgage payments throughout the life of the loan.

Loan recast differs from a loan refinance in several ways. For one, the fees are usually minimal, around $150, compared to the thousands of dollars required to refinance a loan. Second, instead of taking money out of the equity as in some refinances, the homeowner puts money in with the goal of lowering the principal owed. Third, the terms and conditions of the loan do not change, though due to the payment to the principal, the payments will be lowered. How significant the change depends totally upon the amount put into the loan.  Of course, since the borrower is giving money to the bank rather than asking to borrow more, the borrower does not have to supply credit report, tax returns or other financial information.

Some Loans Cannot Be Recast

For those with FHA or VA loans, the issue is simple: the loans cannot be recast. These are government-backed loans and are simply too complicated to allow it. Then, many lenders will not recast adjustable loans [ARMs] or jumbo loans. Also, many banks simply do not offer loan recasting and even those that do must be prodded and poked into offering the service . The borrower must be proactive.

Who Would Benefit?

Obviously, the main beneficiaries of a loan recast would be those who already have their mortgages at low fixed rates.  If the interest rate is higher than, say, 5%, it’s usually not worthwhile for the borrower to pay it down unless absolutely no other option  is open.  Above 5% interest, all things being equal, it makes more sense to seek out a refi. Also, since the payments of adjustable rate mortgages can easily be changed simply by adding the extra money to the principal as the rates re-adjust every few months or every year depending upon the terms of the note, most borrowers with ARM mortgages do not need to recast their loans.

Loan recasting may apply even to underwater homes. Assuming that the homeowner is current in his present payments and determined to stay in the home no matter what and, further, is convinced that with time and patience the home will rise in value, the underwater homeowner may decide that a loan recast is the best option. Though the government and numerous housing advocacy groups have suggested principal reduction to the banks as a way to alleviate the housing crisis, by now it is pretty clear that  forgiving debt is the last thing that the banks want to do. With a loan recast,  homeowners take  matters into their own hands.

Loan recasting is not by any means a panacea as it can apply only to a few. The borrower must have a significant amount of money to put into the mortgage, must be current, must have a fixed mortgage and must be satisfied with the current terms and conditions.  For those who do meet these criteria, loan recast is yet another financial tool to help weather the housing downturn.

 

 

Condos: Why The Complex Should Be FHA-Approved

If you hadn’t noticed, the housing market has slowed to a crawl since the expiration of the home buyers’ tax credit. For those who are trying to sell their houses either as a short sale or a standard sale, it’s becoming that much more difficult. Add to problems with appraisals, issues with underwriting and stingy banks a dearth of buyers. Inventory is up; demand is down.

Why is selling a condo even more difficult?

It seems-around here at least-that the majority of buyers still prefer a single family house with a yard for the dog and the kids and even a white picket fence. Of course, standalone homes do cost more, so frequently-though not always-the condo buyer is looking at price. Many condo buyers eke out a down payment so they can squeak into the payment and get themselves a property. Of course, there is such a thing as a luxury condo market, but we can safely say most condo buyers are very concerned with price.

What is FHA and Why Should I Care?

Enter the FHA loan. FHA is a government-backed loan which allows the buyer to purchase a property with 3.5% down and some extra money for closing costs which can be paid by the seller or the bank if it’s a short sale. FHA loans also allow lower FICO scores and higher “ratios”, the total housing cost paid by the borrower. Sometimes, FHA ratios can go to 50%, 55% or even 60%, allowing the buyer to get into the property for very little money.

Funny thing about FHA loans. During the “bubble years”, they all but disappeared. They take a bit longer to do. The lender has to know what he’s doing -a rarity in those years, and they do cost the buyer more in the long run. During those years, though, Congress  changed the loan limits repeatedly as prices soared. Today, depending on the area, loan limits run as high as $729,750. Beyond that, it’s luxury property to the FHA,and you don’t need the government’s guarantee to buy your house.

Today, because money is tight and and appraisals are often arbitrary due to new regulations, FHA-backed loans have really saved the day. Today, more than 30% of all loans are FHA, up from 3% in 2007. Big jump! For you, trying to sell your condo, this means your complex really, really needs to be approved by FHA. If it’s not, you are missing a big chunk of the market.  If you are a buyer using FHA or not, it should still matter because of what it means for resale down the road. If you buy into a non-FHA approved complex, then you may have problems selling it, too.

Is My Complex Approved and Does It Matter?

In the past, having the complex approved didn’t make so much difference because FHA would “spot” approve a  loan in non-FHA-approved complexes depending on the details. FHA no longer allows this. It makes sense, too, because guaranteeing 30% of the market has put FHA on the line and it needs to protect itself as much as possible. Now, the complex must be FHA-approved to use FHA loans.

By now, you’re wondering if your complex is FHA-approved. You don’t need to call me to find out. Just go to www.fha.gov , enter your complex’s information and voila! you will know. If you a buyer and want the real lowdown on the complex, and that is vitally important information to have–go to Check.FHAA which for a small fee tells you about approval, and outstanding liens,pending litigation, percentage of units financed by FHA, percentage owner-occupied or investor-owned. Also, the complex’s management company or Board President if it’s small should be able to give you this information.

If your complex is not FHA approved and you want to sell, the Check FHA Approval site will show you if the complex is even eligible. Then, get the HOA, the management company or even your own attorney to get the ball rolling. It’s worth it.

Great Short Sale News. You CAN Buy Another House.

Losing sleep over the precipitous drop in the value of your home? Wondering how you can continue to make payments on that $500,000 loan when the home now seems worth at most $300,000? Casting  jealous glances at the newcomers in your area who are getting bargain prices and bargain rates?

Guess what? Now you can short sell your home AND  buy another house at today’s prices and rates.

Over 14 million loans in the U.S. are now either underwater or in some stage of foreclosure. About half the nationwide sales to new buyers are either repossessions or short sales.  It seems to most underwater homeowners that there ought to be some way to connect the two–now there is. You can short sale your home and buy a similar property for half the price.

Lenders are  now coming out with new programs, many insured by FHA, which make it possible for homeowners to short sale their homes and simultaneously buy another property at today’s prices and today’s rates. Many homeowners have allowed their homes to go into foreclosure or waited helplessly for the loan modifications that never came simply because they couldn’t figure out where they were going to live if they left their homes. Some decided to stick out the school year. Others couldn’t bear to leave the neighborhood. Now they don’t have to.

Here are a few of the guidelines that will allow homeowners to short sale their current home and simultaneously purchase another home. First, they must be current on their mortgages. So, owners who have “let the property go” or who were not financially able would not qualify. Finally, here is some reward for those who have steadfastly made their payments in the face of dropping values.

Second, they must be able to qualify for the new mortgage.That means a FICO of at least 640 and income sufficient to pay for the new mortgage.That’s not as hard as it may seem. If a homeowner can pay the $500,000 mortgage at 6% or 7%, no matter with what great difficulty, think how easy it will be to pay the $300,000 with a 5% mortgage for an identical property.

Third, the buyer must have money sufficient to pay the minimum 3.5% FHA down payment and the accompanying  closing costs. The short seller will get no proceeds from the sale of his property. That’s a given. So, where will the money come from for the new property? If  it’s an FHA loan, the minimum down payment is 3.5% and that total amount can be a gift. Also, the short seller is eligible for the federal tax credit which goes up to $6500 for move-up buyers. That may be applied to the down payment or closing costs, but this is not yet determined.

Finally, some programs require that the new loan cannot be more than the previous loan. So, in this case the new loan cannot be more than the $500,000 which the  buyer was paying on the previous home. With the drop in prices today, in most markets, this will be an easy criterion to satisfy.

Impetus to do short sales just got much bigger. If you’ve been dithering about what to do and how to house the family after a short sale, these new loans could certainly aid in the decision-making process and give you peace of mind. Short selling your home and buying another one at today’s much lower values may, in fact, result in a significant improvement in your housing standards…

Loan Restructuring v. Loan Modification: What’s the Difference?

Cover for the first Zombie-Loan manga volume
Image via Wikipedia

Mortgages and foreclosures, never popular topics, are dominating the news lately. Gradually, we are learning ways to halt or at least slow this onslaught of foreclosures ravaging neighborhoods and ruining lives.  One stop-loss method is loan modification. Typically, loan mods are for homeowners who are behind in their payments and are facing  foreclosure. In fact, I’ve even done a previous post about Loan Mod Myths.

Yet, loan mods do work. Here’s who will benefit from a loan mod:

Loan Modification Eligibility

  • Minimum of 12 months elapsed since loan origination date.

  • The mortgagor [homeowner]  most be delinquent (3 full payments due and unpaid) or more.

  • Default due to a verifiable loss of income or increase in living expenses.

  • The Loan Modification mortgage must remain in the first lien position.

  • Loan may not be in foreclosure when executed.

  • Owner occupant, committed to occupy property as primary residence.

  • Mortgagor has stabilized surplus income sufficient to support the Loan Modification mortgage.

  • Does not have another FHAinsured mortgage.

In some cases, the banks today will modify loans for those who are less than three months late. And, banks will modify investor-owned or non-owner occupied. Banks do require financial information, such as pay stubs and tax returns, but credit scores are not an issue.

What this all means is that you must have enough income to support the new payment. Banks will not modify your loan if you cannot show you have the income to sustain the new, lower, payment.

If you can’t show the income, then the best option for you is probably a short sale which will do less damage to your credit than a foreclosure and allow you to purchase another home within 2 years, provided, of course, you’ve paid your debts during these years and you can qualify for a loan.

What about those who are not behind in their payments?

For those current in their payments, Loan Restructuring , may be the answer. If you have not missed payments or perhaps find yourself owing more than your home is worth, you may be able to  redo your  loans without having to bear the cost of refinancing.

How is this possible?  Who is eligible for loan restructuring? Essentially, if you do not fall into any of the loan mod categories, then you may be eligible for a loan restructuring.

Loan Restructuring Criteria

  • Homeowner may be current in mortgage payments or  have missed a payment or two
  • Mortgagor does not have to reside in the property; investment property qualifies.
  • Mortgagor may receive a reduction in principal, interest and a cash refund.
  • No “Hardship” letter is required.
  • Existing income, debt, credit scores  do not matter.

A loan restructuring may enable you to reduce your principal, especially in areas where property values have fallen drastically and many owners are thinking of “walking away.” How exactly can this happen?

In seeking to restructure a loan, the homeowner re-examines the loan at the point when it was originated.  Attorneys or real estate brokers, like myself, working with attorneys search the documentation of the loan to see if it was  predatory in nature or, if not, if it  did not fully comply with federal Real Estate Settlement Procedures Act [RESPA] requirements. If a flaw is found,  the original loan is voided and restructured (not modified). This allows the homeowner or his representative  to negotiate with the lender from a position of strength. If the loan was “bad” from the beginning, why modify a loan to the advantage of the lender? Restructuring is clearly the best option for the homeowner.

If the loan is found to be predatory or in violation of RESPA, the homeowner may also be eligible for a refund of all or part of the original closing costs.


As we have all heard, banks packaged our mortgage loans into so-called “exotic” financial instruments and sold them all over the world. It’s these mortgage-backed securities and credit default swaps which are the original cause of our Current Recession. In their bottomless greed, banks sold and resold mortgages, slicing and dicing them into parts which they cannot now put back together. It is these mortgages which are great candidates for restructuring.

If you think you might qualify for a restructuring, call or email me and for a small fee we can find out. If your loan is not eligible for restructuring, the fee will be returned.

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And Now For the Good News

Finally, some relief for California home sellers and home buyers. As part of the federal stimulus package,  conforming loan limits have been raised substantially, up to $729,000 and, to FHA  loan limits are up to the same amount until the end of the year.

Well, hooray for mortgage wonks! We were hoping for something that made sense,  you might say…Here’s what it all means…

 Until now, conforming loan limits,  meaning those conforming to the guidelines issued by Freddie Mac and Fannie Mae and thus saleable on the secondary market, capped at $417,000. Above that limit and buyers had to purchase a so-called jumbo loan with rates at least 1% higher and sometimes far more. That hadn’t bothered us in SoCal much.  Even with our ever-escalating prices, lenders simply packaged a first loan up to $417,000 and offered a smaller second loan to cover the difference.

Then came August 07 and the subprime crisis hits the fan. Foreclosures start to multiply, so lenders revise their guidelines to plug up the gaping holes speculators and the penniless had been running through. The investors who provide the money for the second loans designate SoCal counties as “distressed” and decline to provide any more funds. 

   Jumbo loans cost 1-3% more than conforming, so who is going to take the hit?   With lenders heading for the hills, it’s pretty clear that sellers will have to revise their prices, but even then buyers are declining to participate. The market slows to a snail’s pace, making a bad situation worse.

 Then, our do-nothing Congress, mired in gridlock, wakes up: 2008 is an election year! Miraculously, passing a bi-partisan stimulus package in record time, Congress  makes sure we all receive $300, $600, $1200 or whatever from our tax returns. But, this bill  also helps home owners sell their homes by raising the conforming  rate up to $729,000 in highest priced areas, such as our own.

 What about the buyers? Buyers will have an easier time to qualify with the lower rates, but first-time buyers are getting a break, too. FHA loan limits are $729,000 until the end of the year; that rate expires  right after the election. FHA loans typically have down payments of 3-5% or 103% of the purchase price for repairs, all guaranteed by the Federal Housing Authority [FHA]. FHA made home ownership possible for millions of Americans after World War II. FHA may save us once again.

So, you see this is really good news, not just for wonks but for home sellers and first time buyers.